Turnover Is Vanity, Profit Is Sanity: 9 1/2 Steps to Improving Your Profits & Cashflow

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Profit is not the primary indicator for a bank to assess a business. Instead, a bank will look at the net cash flow (as illustrated above) and other factors such as: Another problem with “profitability” is what happens when the business you are examining is in its infancy and during a high growth phase. The importance of cash flow goes beyond the business entity itself. It also has implications for the individuals within it, for the customers and suppliers who interact with it, and for the community and society as a whole.

Cash in the bank cannot be disputed. It is actually there. Whether it has come from retained earnings or by the surplus of revenue minus the costs, its presence is reassuring for a business owner. Cash flow is essential in business because it provides a measure of value for financial decisions. A company that cannot pay its bills will not survive. In many cases, it will be forced out of business. If your business has a good turnover and makes decent profits, then you need to chase the money that you’re owed by customers to make sure that you have a healthy cash flow. To quote Alan Sugar, “Getting paid is the most important part of your business.”There is a lot of talk about average rents or average yields and if average is good enough then happy days, but if a better return on investment is needed then average just will not do… It’s essential to understand Break Even Point Analysis as so much of your thinking about profitability needs to be based on it.

Some just don’t ensure accurate, timely financial reporting. I mean no P&L for months! Many others clearly do not understand the numbers put in front of them. Really. Even the difference between ‘ Revenue‘ and ‘ Gross Profit‘ eludes some of them. And plenty of others get lots of information, but focus on entirely the wrong data when they do look at it.For example, if the Turnover is high, but the gross profit is low,you can try to renegotiate with your existing supplier to reduce the costs or look for another supplier or increase the selling price. The problem is exacerbated by the fact that the numbers by themselves can be sometimes misleading. You need to be able to understand their true, often hidden, meaning. There’s any number of metrics out there that business owners can use to benchmark the success of their venture. Some are better than others. Income statements and balance sheets often tell an incomplete picture at best, and an inaccurate one at worst. It’s easier to spin these figures in a positive manner, whereas cash flow statements provide an unvarnished glimpse into your company’s overall health. Note that we can drill down even further. Cash flow can be categorized into Operating Cash Flow (OCF) and Free Cash Flow (FCF). Free Cash Flow is Operating cash Flow minus Capital Expenditures (CapEx). FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. FCF is important because it allows a company to pursue opportunities that enhance shareholder value.

To put itanotherway, we can think of Turnover as the amount you invoice your customers for the sale of service or product, excluding VAT and any discount. What Is Turnover? The amount of cash on hand is sometimes referred to as "liquidity". Liquidity is a measure of the ease with which one can convert a sum of money into other assets. When liquidity is high, it is easy to convert money into more money, using available assets. It is easier to find someone willing to lend money or to borrow money because it is less likely that you will default on your loan. Conversely, when liquidity is low, it is difficult to convert cash into other assets, so it is difficult to get a loan, or to find someone willing to buy your products or services. In business, the most common way of measuring liquidity is by calculating cash flow, and then comparing this to its total assets. This is a simple method, but it does not take into account the complexity of the company's relationships with other parties. Don’t be deluded by the sexy allure of high revenue if that is not based on reality. All basic numbers, Revenue, Profit and Cashflow, are critical for understanding your company’s health and should be used in conjunction to paint a picture of what is truly happening. It simply means that while the massive sales turnover looks impressive, there is rarely a commercial benefit to this unless it creates the profit.Cash is reality. Make sure every ‘deal’ you plan to do, every new strategy, every new hire, is only ever agreed to, once you know the cash implications. This issue is especially prominent in B2B transactions, where the clients usually have a leeway of paying for your services during a period of 30, 60, 90 or even more days. Of course, times have changed. Retailers are now far more forensic in their store appraisal processes (better late than never) and the focus is now much more on profitability. And this is true of all their operations, not just their property-based ones. Finally, as the case is with most of these financial numbers, you need to compare revenue with other companies within your industry. Otherwise, this comparison might not make much sense. I’m going to assume you’re not a finance person. If you are, this article will be akin to preaching to the choir. I’m also assuming you’re either not receiving cash flow reports today, or if you are, you’re not analyzing them to the extent you should.